We are recommending Buy on our Actionable ViewPoints "KNR Constructions" as per following:-
CMP: Rs 1744 Target: Rs 2267 (30% Upside)
Key Points:
Lumax Industries: Viewpoint - LED lit future.
· LIL to be key beneficiary of rapidly increasing LED trend in automotive lighting; To comfortably outpace industry growth: The proportion of LEDs in automotive lighting is set to grow exponentially given the increasing acceptance of OEMs. The passenger segment, including passenger vehicles (PV) and two wheelers (2W), is rapidly adopting LEDs in lighting. LEDs enhance the aesthetic looks of a vehicle and are being increasingly offered by OEMs to improve the overall appeal and are becoming key differentiating factors. Moreover, LEDs consume less energy as compared to conventional lightings. With the advent of BS6 norms (production of BS6 vehicles is expected to start from November-December 2019), automotive companies would be required to install lot of sensors and electrical parts, which would consume lot of energy. OEMs are looking to save on energy consumption, thus LED provides an apt solution. (LED consumes about one-fifth of energy as compared to conventional lighting). Further, the mandatory Automatic Headlamp On (AHO) regulation introduced recently for 2W (results in running of headlamps for the entire day) is also likely to lead to the shift in favour of LEDs. Lumax Industries Limited's (LIL) proportion of LEDs has grown impressively to 35% of its total revenue as of 9MFY2019 from 20% in 9MFY2018. Management expects the strong momentum to continue and expects the proportion to reach 50% mark over the next 2-3 years. Realisations of LED lights are higher by 2.5x-3.0x as compared to conventional halogen lamps, and this would boost realizations. With its leadership position in PV LED (has about 55% market share) and strong position in 2W LED (about 37% market share), LIL is likely to be the key beneficiary of the trend and we expect LIL to comfortably outgrow the automotive industry's growth. We expect LIL's revenue to report a robust 14% CAGR over FY2019-FY2021, comfortably beating the expected industry growth of 5-6%.
· Superior product mix, increased localization and operating leverage to aid in margin expansion: With increased proportion of LED systems, LIL's margins are set to improve. As per management, LEDs fetch 200-300 BPS higher margins as compared to traditional halogen lighting. Further, with the support of its technology partner (which is a leading player in LED systems globally and is the only lighting service provider that manufactures LED bulbs in-house), LIL is well placed to improve its operational efficiencies. Moreover, LIL is planning to localise sub-assemblies and LED light design. Currently, imports constitute around 23% of total purchases. LIL has approved investment of Rs. 75 crore to be utilised for localisation and expects benefits to flow in from H2FY2020. Further, strong double-digit topline growth would bring in operational leverage, which would aid in margin expansion. Overall, we expect LIL's margins to improve by 70 BPS to 9.3% over FY2019-FY2021.
· Outlook: Amongst few fastest growing ancillary companies set to capitalise on the technological change; Expect robust 20% PAT CAGR over the next two years: The trend of OEMs increasingly adopting LED lighting is likely to immensely benefit LIL. With LED realization higher by 2.5x-3x, and given LIL's leadership in the PV segment and strong market position in 2W, it would significantly outgrow the industry. With strong technology access from its Japanese partner (holds ~38% in LIL), LIL is set to ride the wave of technological change in the automotive lighting systems. On the back of better mix and increased localisation, LIL's bottom line is expected to report a sturdy 20% CAGR over FY2019-FY2021, which is amongst the fastest in the automotive space. LIL is a quality auto ancillary company with a strong balance sheet and robust return ratios of ~20%.
· Valuation - Robust growth coupled with attractive valuations; Initiate with a Positive view: We expect LIL to report a robust 14% topline and 20% earnings CAGR over the next two years. At the CMP, LIL is trading at 13.8x its FY2021 earnings, which is attractive in the wake of strong growth prospects. Moreover, LIL has strong return ratios with ROE around 20% and ROCE at 22-23%, which makes it a perfect candidate for re-rating. We initiate viewpoint coverage on LIL and expect 25-30% upside from current levels over the next 8-10 months.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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